The 2023 annual strategy of the chemical industry: demand is expected to recover, optimistic about the medium and long-term development prospects of integrated leaders and new materials in 2023

The 2023 annual strategy of the chemical industry: demand is expected to recover, optimistic about the medium and long-term development prospects of integrated leaders and new materials in 2023

The current industry valuation is at a low level. To maintain the industry outperform rating, it is recommended to focus on four main lines of investment.

Key points supporting the rating

In 2022, the global economic growth will slow down. From January to September 2022, the growth rate of revenue and total profit of chemical raw materials and chemical product manufacturing, chemical fiber manufacturing, rubber and plastic products and other first-level sub-sectors have all declined. Compared with the previous inventory cycle, the current inventory level is higher, and the demand at home and abroad is weaker. This round of active destocking cycle may be extended. In 2022, after a sharp rise in international commodity prices, they will fluctuate from a high level to a downward trend, and industry PPIs will continue to fall. As of November 18, 2022, 59.4% of the key tracked chemical products have an average price increase in 2022 compared to 2021.

On the demand side, the current downstream demand is sluggish, domestic and foreign demand is expected to recover in the future, policies such as stabilizing growth are expected to be followed up, and the demand for chemicals related to real estate and other industrial chains is expected to improve. In the field of agriculture, the price of agricultural products is relatively high, and the attention to food security has increased. The global agrochemical industry may maintain a relatively prosperous situation. In terms of export, the high price of energy overseas, especially in Europe and other places, is conducive to the export of some domestic chemical products. After domestic private petrochemical and other projects have been put into operation, the global competitiveness of domestic petrochemical and even several chemical sub-sectors has continued to improve. On the other hand, the independence of key materials in the fields of semiconductors, new energy, aerospace, and military industries is becoming increasingly critical, and outstanding companies in related fields are ushering in good opportunities for development.

On the supply side, since the outbreak of the epidemic, the cumulative fixed asset investment completions of various sub-sectors hit bottom in 2020 year-on-year, and then fell back after rising. In the first three quarters of 2022, the construction in progress of the chemical industry was 898.352 billion yuan, a year-on-year increase of 14.02%. than 71.55%. In the medium and long term, the concentration of the industry will continue to increase, and leading companies will gain more market share and higher profitability in the future.

On the cost side, in the first half of 2022, affected by the conflict between Russia and Ukraine, international oil prices will break through the upward trend; in the second half of 2022, affected by factors such as the Fed’s continued interest rate hikes, increasing fears of a global economic recession, the sluggish European economy, and weak demand in China, international oil prices will be relatively low. It fell slightly in the second quarter, but is still at a historically high level. We believe that in 2023, the relationship between supply and demand of crude oil will tend to be balanced, and the tight supply situation will gradually ease. The center of gravity of crude oil prices is expected to drop from a high level. However, it is necessary to be alert to the unexpected impact of factors such as OPEC's production reduction policy, Russia-Ukraine conflict, and domestic epidemic prevention and control policy changes on oil prices.

  Investment Advice

As of November 25, 2022, the price-earnings ratio (TTM excluding negative value) of SW Basic Chemicals (version 2021) is 14.50 times, which is in the 4.15% quantile of history (2002-present), and the price-to-book ratio is 2.31 times, which is in the The 33.40% quantile of historical levels; SW Petroleum and Petrochemical (2021 version) price-earnings ratio (TTM excluding negative values) is 11.47 times, which is in the 1.60% quantile of history (2002-present), and the price-to-book ratio is 1.28 times. At the 3.73% quantile of historical levels. The current sector is at a historically low valuation. Affected by factors such as the global macro economy and the epidemic, the industry's prosperity will be relatively sluggish in the second half of 2022. It is expected that the macro economic environment will improve in the future, and the demand side is expected to recover. The industry's outperform rating is maintained. New material companies with growth attributes are expected to go through the cycle of demand fluctuations, and integrated leading companies are currently entering a long-term layout. It is recommended to pay attention to the following investment leads:

1. Leading enterprises have strong anti-risk capabilities, and are expected to benefit from the high energy background in Europe, and pay attention to the continuous extension of new energy and new materials. Recommended: Wanhua Chemical, NHU, Hualu Hengsheng.

2. The profits of private petrochemical companies are expected to bottom out. After the oil price has dropped, we are optimistic about the long-term development of domestic private petrochemical companies, and we are optimistic about private refining and chemical companies entering new energy, high-performance resins, degradable plastics and other high-growth new material fields. Recommended: Rongsheng Petrochemical, Dongfang Shenghong, Satellite Chemical, Tongkun Co., Ltd., attention: Hengli Petrochemical.

3. There is an urgent need for domestic substitution, and new materials are expected to continue the boom. New downstream production capacity is gradually launched, and it is expected that the production and sales of companies such as semiconductors and new energy materials will continue to remain strong. Recommended: Wanrun Co., Ltd., Jingrui Electric Materials, Yake Technology, Lanxiao Technology, China Ceramic Materials, Anji Technology, Real Madrid Technology, Guangwei Composite Materials. Follow: Dinglong Co., Ltd., Huate Gas.

4. The prosperity of fluorine chemical industry is expected to improve, and the prosperity of pesticides is expected to maintain a relatively high level. The three-generation refrigerant quota is about to be implemented, the new energy industry is developing rapidly, and the demand for fluorine chemical-related products is expanding, and high-quality fluorine chemical companies will benefit. Pesticide companies are expanding their production capacity and upgrading their products, and their continued growth is worth looking forward to. Recommended: Juhua, Lier Chemical, Lianhua Technology, attention: Xianda. In addition, under the "steady growth" infrastructure construction is expected to continue to make efforts, and some building structural materials companies will benefit. Recommended: Subote.

The main risks faced by the rating

The risk of falling oil prices; risks brought about by changes in environmental protection policies; abnormal economic fluctuations; the domestic epidemic lasts longer than expected; the global economic downturn.